Moody’s Highlights Risks Associated With Blockchain-based Tokenized Funds

• Moody’s have warned of the growing technical risks connected to digital investment vehicles.
• Fund managers need to have a deep technical knowledge to handle these digital assets.

Investment in assets like government bonds might be more efficient with blockchain-based tokenized funds, according to research by Moody’s, a world-renowned credit rating agency.  Despite the advantages, researchers at Moody’s have warned of the growing technical hazards connected to these digital investment vehicles.

The use of tokenized funds that are based on the blockchain has been on the rise, and Moody’s has noticed that it’s making investment in government bonds more efficient. Increased market liquidity, accessibility, reduced costs, and fractionalization are all made possible by these tokenized funds, which are digital versions of conventional investment vehicles.

Significant Growth

The recent interest rate rises by the U.S. Fed have made investments in government securities more appealing, which has contributed to the spike in popularity of tokenized funds.

The issuance of tokenized funds secured by government securities increased from $100 million at the beginning of 2023 to over $800 million by the end of the year on public blockchains, according to experts at Moody’s. This growth was driven by both conventional financial institutions and crypto firms.

Despite the potential lack of liquidity, Moody’s proposes that tokenized money market funds might be used as a substitute for stablecoin collateral in Decentralized Finance (DeFi) markets.

Fund managers need to have a wider breadth of technical knowledge to handle these digital assets. This is because service providers in this field don’t often have long track records, which leaves them open to payment interruptions caused by technology failures or insolvency.

Public blockchains also pose technical hazards, such as the possibility of hacks and governance problems. Another risk factor is the potential exposure of fund collateral to stablecoins.

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